We consider the economic implications of a compressed wage structure
which is exogenously determined by institutions. An important
feature of our analysis is that human capital is endogenous and can
be achieved either as formal education or as informal training within
firms after entering the labour market. While institutional wage compression
decreases the incentives of individuals to become educated, it
increases the incentives of firms to invest in training. As a result, the
net effects of wage compression on the aggregate human capital level
and GDP are ambiguous. Moreover, with wage compression, a skillbiased
technological change may cause wage inequality to decrease.
Keywords: Wage compression, training, education, inequality, institutions,
skill-biased technological change.
JEL: I21, J31, J5, O33.